GCC Indirect Tax Weekly Digest

Bahrain to implement VAT from 1 January 2019

We understand that Bahrain’s parliament on Sunday approved an implementation date for Value Added Tax (VAT) of 1 January 2019.

This will make Bahrain the third Gulf Cooperation Council (GCC) country to implement VAT, after the United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA) did so on 1 January 2018.

Although no draft law has yet been released, within the next three months, businesses making supplies in Bahrain will need to make the necessary changes to their processes to be prepared for the introduction of VAT and a registration process. In order to reduce any delays in achieving the required level of readiness, we would suggest that those businesses that have not yet commenced the process of preparing for VAT, do so as a matter of priority.

A wide-ranging VAT implementation process will be necessary for businesses exceeding the mandatory registration threshold of SAR 375,000 in annual supplies (or SAR 187,500 for the voluntary registration threshold).

Deloitte has gained extensive experience in advising clients on large-scale VAT implementations in both the UAE and KSA and has also built its tax technology capabilities with a view to being in a position to assist clients that require those services.

An invite to a Bahrain VAT Law Awareness session to be held shortly is also in process of being sent out to interested clients. If you do not receive an invite, and wish to attend, please feel free to contact your usual Deloitte contact.

UAE FTA publishes updated version of real estate VAT guide

The UAE Federal Tax Authority (FTA) has published an updated version of its Real Estate VAT guide. The guide is intended to clarify the VAT treatment of real estate supplies to businesses operating in the real estate sector, and is also relevant to owners and landlords of real estate.

The new version of the guide elaborates on the VAT treatment applicable to the construction industry (Section 12). The following points summarize the added details:

Continuous supplies of services

Special rules apply to services which are supplied on a continuous or ongoing basis over a period of time (continuous supplies of services).

• A supply is considered a continuous supply where both factually and contractually multiple payments are to be made under the contract.
• Article 26 of the Federal Decree-Law No. (8) of 2017 on Value Added Tax (“Decree-Law”) will apply in the case of continuous supplies.
• Under this Article, even if the services are contractually complete, there is no tax point until the earlier of when an invoice is issued, or payment is received, or 12 months has passed since the provision of the Goods or Services without there having been either an invoice issued or payment made.

Retention payments

This is still considered within the industry as a contentious issue on the basis that there are no special rules for determining when VAT is due on a retention payment. As a result, there are a number of different approaches that have been adopted within the industry, and the FTA are seeking to provide greater clarity as to the application of the provisions.

If the work is not considered as contractually complete until the recipient has given sign off on it, then the tax point shall be the earliest of:

• the date the retention payment is made; or
• the date on the tax invoice issued in relation to the retention; or
• 12 months from the date the work is signed off as complete (i.e. certified).

Otherwise, the tax point date for the retention will be the date the services were completed (or date of issue of invoice or receipt of payment if earlier).

Snagging

If a second supplier is used to rectify issues in the case of snagging (where a customer is not satisfied with the standard of work done by the original builder), then VAT will be due on the services of the second supplier to the customer.

• If the customer withholds the retention payment on the original contract permanently, then VAT will not be due on it.
• If the supplier already accounted for VAT (by either issuing a tax invoice, or if 12 months had passed), the supplier may use the bad debt relief provisions or a credit note to credit the overpaid VAT.

UAE FTA publishes guide on the VAT treatment of insurance and related services

The UAE FTA has published a new guide on the VAT treatment of insurance and related services.

The guide is intended to support businesses in the insurance industry in determining the types of services within the sector which are subject to VAT and those which are exempt.

Significantly, the guide also considers the application of input tax apportionment methods. As many businesses in the sector will be partially exempt from VAT, the FTA’s guidance on this matter should be reviewed carefully. 

Topics such as composite supplies, Islamic finance products, travel insurance, real estate insurance, and health insurance are also considered.

One interesting outcome from the commentary in the guide is the importance of the labor law under which employees have been employed, as this is usually Emirate specific. That will drive the degree to which dependents of an employee may need to be covered (if at all) by health insurance. This will usually determine whether the employer will be entitled to claim the input credit on the health insurance premium.

Please refer to the recent alert Deloitte has published on the guide, for a more detailed summary.

This digest is for information purposes only and should not be construed as advice. It does not necessarily cover every aspect of the topics with which it deals. You should not act upon the contents of this alert without receiving formal advice on your particular circumstances.